China resources outlook cautious despite commodity gains

THE Commonwealth’s chief commodity forecaster has reported unexpected surges in coking coal and iron ore are tipped to add $47bn to export income this year alone.

However, it also warns the price increases, like that of coking coal in the last few months of 2016, will not last.

The forecast was reinforced by research released by the Westpac Institutional Bank and the Australian Government examining developments in the Chinese economy in the third and fourth quarters of last year.

It found thermal coal prices rose to their highest level in more than two years during the third quarter (of 2016) because of mandated production cuts in China.

Newcastle spot prices increased 30% for the quarter.

Australia exported 10m tonnes of thermal coal to China in Q3, up 33%.

Export earnings increased 36% to $607m.

Spot prices for metallurgical coal increased sharply in Q3 and into early Q4, driven by supply disruptions, and to a lesser extent, robust demand from China’s steel making sector.

The China Resources Quarterly was compiled against this more positive backdrop, but it warned that “China’s domestic demand impulse remains narrow and external demand is limited”.

“As a result, nominal activity growth is subdued compared to the double–digit percentage growth rates that were common place for much of the last decade,” said the report.

Key to Australia’s budget outlook is China’s demand for raw materials, which is predicted to lower as commodities supply increases and Chinese housing demand slows. Australia’s trade balance swung from a $1.1bn deficit in October to a $1.2bn surplus in November, also reflecting commodity gains, but independent economist Saul Eslake reportedly said the government was right to assume the gains might not last.

The China Resources Quarterly found that the commodity price rally, which commenced in Q1, had continued through to November. It said that “reversal of these gains into 2017 seems likely as supply increases”.

“Into 2017 we expect prices to revert back towards cost curves, as the supply of key commodities adjusts to current windfall profits, and speculative demand softens under the weight of falling prices,” said the report.

Given the strides made by Australian bulk commodity producers in lowering their production costs and increasing capacity, the report says they are expected to play a “significant role in the supply adjustment”.

“Further, they remain in a strong position to weather any undershoot in prices that may result from increased supply. However, those further up the cost curve, including private Chinese producers, are in a much more precarious position,” said the report.

Overall, export volumes are forecast to increase in each of Australia’s top five resource and energy commodities in 2017-18. Iron ore is expected to remain the nation’s biggest earner, despite a forecast 8% fall in export revenue in the next financial year.